Buying a home is a big decision. Before you dive in, it’s critical to think through the process of buying a house. If you follow a few simple guidelines, you can actually enjoy learning about your goals and financial outlook.
The initial steps in how to buy a house are:
- Determine if you’re ready to buy a home
- Assess your financial situation
- Find the needed credit score to buy a house
- Discover what credit score is needed to buy a house
- Determine how much down payment you need
- Get a mortgage pre-approval
- Find the right real estate agent
Let’s get your
home-buying
journey started with some questions to explore.
Are you ready to buy a house? What kind of house best suits you?
When you buy a home, the financial commitment is enormous. It is the biggest single purchase most people make in their lifetime. It comes with both risk and reward: the risk is that your investment doesn’t pan out as you had hoped. The reward is that you control your home, how it looks, the color it is painted, the finishes on the cabinets – and the equity you grow.
One of the first steps to buying a house is to outline how homeownership fits into your long-term goals. Maybe you see homeownership as a path to wealth building: rather than paying rent to a landlord, you pay a mortgage and build home equity.
Or you could be planning to start a family and want a home for the stability it brings. If you are buying a home with a partner, talk together about the qualities you each want in a home. Seeing what is available in the market also gives you a good idea of what you want out of a house. Looking at housing listings in
different cities
can narrow down your search.
How stable is your financial and employment situation?
Next, you will outline your financial status. Lenders say that to qualify for a mortgage, you need an adequate income and a stable work history of at least two years at one job.
You also need to look at your debt-to-income (DTI) ratio. DTI is a simple calculation of monthly debt divided by monthly income. It plays an important role in determining if you have an adequate credit score to buy a house.
To determine your DTI ratio, start a spreadsheet of all monthly payments like car payment, student loan and credit card payments. Divide the total by your monthly income. The result is your DTI ratio. Typically, it needs to be less than 50% to qualify for a mortgage.
What credit score is needed to buy a house?
The minimum credit score to buy a house is 620, according to Investopedia.com. The higher your credit score, the better your loan options and rate will be. A credit score above 720 typically gets the best loan.
Your credit score is an assessment of how risky you are to lend money to. It’s based on:
• Payment history
• Amount of money owed
• Length of your credit history
• Types of credit used
• Pursuit of new credit
One of the most important steps in the process of buying a house is getting a periodic credit report to make sure it is at least the lowest credit score needed to buy a house – the magic 620. To keep your credit score high, you should pay your bills on time every month, pay off debt when you can and avoid opening new lines of credit.
How much down payment do I need?
In today’s market, many homebuyers do not put 20% down. First-time Colorado buyers who financed their home typically financed 95% of their home purchase compared to repeat buyers at 81%, according to the recent 2020 Profile of Home Buyers and Sellers released by the National Association of Realtors® (NAR) NAR.
The report shows that
Colorado home-buyers
typically financed 86% of their home’s purchase price. That translates into down payments between 5 and 14%. First-time home buyers often rely on down payment gifts and loans from family. Among home buyers ages 28 and younger, 28% used a gift from a relative or friend to make a down payment, according to NAR.
To better understand some of the top cities to live in check out Colorado's Top Cities to Live In.
Get preapproved for a mortgage
If your pre-home buying discovery process shows you are ready, the next among the first steps to buying a house is to apply for preapproval for a mortgage. You will answer questions about your income and assets and the amount you would like to borrow. Your lender will do a credit check. If you qualify for a mortgage, you will receive a preapproval letter that outlines the amount you can borrow.
Find the right real estate agent
The final step is to find the right
real estate agent. An agent who is knowledgeable about the area guides you through the home buying process. They help you find homes that meet your desires, set up showings, and help you write offers and negotiate.
As a buyer, you can usually work with a real estate agent for free. In most cases, the seller pays the buyer’s real estate agent’s commission.
Tom Kalinski is the broker/owner of RE/MAX of Boulder, the local residential real estate company he established in 1977. He was inducted into Boulder County’s Business Hall of Fame in 2016 and has a 40-year background in commercial and residential real estate. For questions, e-mail Tom at tomkalinski33@gmail.com, call 303.441.5620, or visit boulderco.com.